Josh Mandel is a first-term legislator in the Ohio House of Representatives. He is also a sergeant in the US Marine Corps reserves. Last year, Mandel arrived at the state house in Columbus after a tour of duty in Iraq.

There, he saw first-hand how Iran was fueling the insurgency that is killing his fellow servicemen and Iraqi innocents. His experiences led him to introduce a bill that would divest Ohio's public employee pension funds from companies that do business with Iran and fellow state sponsor of terror Sudan.

As his bill made its way through the various committees, Mandel's initiative received a body blow from an unexpected direction. AIPAC representatives asked him to pare down his bill's divestment requirements to include only companies that invest more than $20 million in Iran's oil and gas sector.

Mandel was surprised. Why should companies that invest in Iran's defense, telecommunications and other sectors be immune from divestment? AIPAC went over his head to Ohio House Speaker Jon Hustead. Hustead amended the bill along AIPAC's suggested lines.

Mandel's experience is not unique.

Christopher Holton is director of the Divest Terror Initiative at the Washington-based Center for Security Policy, where I serve as a senior fellow. In August 2004, the CSP launched its campaign to divest public employee pension funds from companies that do business with countries listed as state sponsors of terror by the US State Department. The decision was inspired by a study of companies invested in states that sponsor terrorism undertaken by Roger Robinson, the founder and president of the Conflict Securities Advisory Group.

Working from Robinson's research, the CSP discovered that on average, 15-23% of US state employee pension funds were invested in companies that do business with state sponsors of terrorism. In 2004, the estimated total value of those investments was $188 billion. Some $70b. was invested in companies that did business with Iran, Syria and North Korea.

In 2005, after coming across the CSP's research, Missouri State Treasurer Sarah Steelman divested a portion of Missouri's pension plans from companies that do business with state sponsors of terror.

In late 2006, the terror divestment campaign received a major boost when Likud leader Binyamin Netanyahu embraced it as a means of slowing down Iran's race to nuclear capabilities.

Encouraged by Netanyahu, Republican presidential hopefuls John McCain, Mitt Romney and Newt Gingrich announced their support for the plan in late 2006. Their announcements induced state legislators around the US to introduce bills that would follow the Missouri example and make their pension funds free of investments in countries that sponsor terror. Working with Robinson, London's FTSE financial index announced last November that it would begin providing a series of terror-free screened indexes that will allow public and private investors to easily screen their portfolios and divest from countries that do business with state sponsors of terrorism.

And then, AIPAC moved in.

Holton assists state legislators in their bid to introduce divestment bills. He explains that in Texas and California, AIPAC lobbyists led by AIPAC's policy director Brad Gordon, advocated that divest terror bill sponsors take North Korea and Syria off their bills. As they did in Ohio, they also strongly recommended that divestiture from companies invested in Iran be limited to companies that invest more than $20m. in Iran's oil and gas sector.

In Texas, AIPAC's interference so frustrated the bill's sponsor, State Senator Dan Patrick, that he allowed the initiative to fizzle out. In California, the bill passed into law reflected AIPAC's view, except that at the insistence of the bill's sponsor Assemblyman Joel Anderson, it also divested California from companies involved in Iran's defense and nuclear sectors.

In Florida, AIPAC pre-empted supporters of broad-based terror divestment. It advocated its pared-down, Iran only, oil and gas sector only divestment plan before a broader-based initiative could get off the ground.

Currently, AIPAC is working to pare down bills in Massachusetts, Maryland, Pennsylvania and Georgia. In the meantime, without AIPAC's intervention, the Louisiana legislature moved toward a broad-based divestment policy by establishing a terror-free investment index last year. Mississippi and Utah are also considering broad-based bills.

A message to Gordon's office this week requesting his comments on AIPAC's actions went unanswered. Ron Dermer, who as Israel's economic minister at the Washington embassy works on the issue with AIPAC, provided three general explanations for AIPAC's actions.

As Dermer explained, first, AIPAC wishes to limit divestment to large investors in Iran's oil and gas sector because that sector – which makes up at least 80% of Iran's exports and 40% of its governmental revenues – is the engine of Iran's economy and its Achille's heel. Second, AIPAC argues that it is unconstitutional for states to divest from companies that do business with terror sponsoring states. Third, AIPAC believes that by limiting the divestment program to Iran's oil and gas sector, they will mitigate opposition from pension and hedge fund managers and so enable more divestment laws to be passed than would be passed if states tried to adopt a broader approach.

YET AIPAC's arguments – as explained by Dermer, who does not work for AIPAC – fail to stand up to scrutiny. While it is true that oil and gas are the anchor of Iran's economy, it is also true that Iran's ability to function economically, support terror and build nuclear bombs is dependent on many other economic sectors as well. It is also clear that the strength of Iran's fuel economy is not dependent only on direct investments in oil and gas but also on indirect investments from other sectors.

Take Iran's dependence on imported refined fuel products, for instance. Although Iran is the second largest exporter of oil and gas after Saudi Arabia, it lacks refining capabilities and so is dependent on imported fuel products. Last week one source of that refined fuel disappeared. India's oil refiner, Reliance, decided to end its supply of refined oil products to Iran after the French bank BNP Paribus announced that it would no longer issue letters of credit for Iran. BNP Paribus and its cohort Calyon bank stopped offering Iran letters of credit due to political pressure from the US Treasury, which sanctions financial institutions that deal with Iran. So in the BNP Paribus example, financial sanctions from the US government on the banking sector are making it more difficult for Iran to run its oil and gas sector.

Many other firms not involved in oil and gas similarly contribute to the viability of the Iranian regime and its rogue activities. For instance, Alcatel SA, a French telecommunications firm, has operations valued at $300m. in Iran, Sudan and Libya. Much of its technology is inherently dual-use with major civilian and military applications. Alcatel's militarily relevant operations in Iran include the provision of data transmission and switching network capabilities to state-owned companies. Alcatel is also installing an undersea telecommunications cable in Iran. It is undertaking similar activities in Sudan and Libya.

Germany's Siemens has operations in Iran valued in excess of a half a billion dollars. They include the development of Iran's mobile telephone network, power plants and transportation sector. All of these projects have enormous military implications. Austria's Steyr-Mannlicher arms manufacturer sold Iran sniper rifles in 2006. None of these companies are targeted in AIPAC's limited divestment plan.

Beyond that, as Holton explains, most of the major companies invested in Iran's oil and gas sector – like France's Total SA and Norway's Statoil and China's Petro China – invested in Iran's oil and gas sector after Iran was declared a state-sponsor of terrorism. That is, they made a conscious decision to invest in Iran in spi
te of its behavior and irrespective of the financial implications for doing so in their trade with the US. The likelihood that these companies will end their operations in Iran as a result of the divestiture movement is not large. In contrast, many companies whose investments in Iran are below $20m. would be more likely to pull out their investments if maintaining them cost them US investment capital. So AIPAC's plan targets companies that are less likely to change their behavior while giving a free pass to companies that are more likely to be convinced by the divestiture movement to pull out from Iran.

AIPAC has informed state legislators who push for broad divestment that it would be unconstitutional for individual US states to divest from companies that do business with Syria. Its contention is based on a US Supreme Court decision from 2000 relating to a Massachusetts statute that prohibited the state from signing business deals with companies that also do business with Burma.

But according to Prof. Orde Kittrie, who served for years as an attorney at the State Department working on issues related to international sanctions, there is a distinction between divestment and taking direct action against foreign firms. A state is within its constitutional rights to decide where to invest its funds.

Finally, AIPAC's argument that broad-based divestment bills cannot expect to pass is troubling on two different levels. First, objectively, this is untrue. Louisiana's law is broad-based. Currently, broad-based divestment bills are moving through the Utah and Mississippi legislatures.

But even if AIPAC is right, and these broad-based divestment bills lack sufficient political support, why AIPAC is actively working to undermine them is a mystery.

There is a legitimate debate regarding the capacity of financial tools to compel governments to change their behavior. Generally speaking, when dealing with ideologically motivated, terror-sponsoring regimes such as Iran, Syria and North Korea, financial tools will be insufficient to force a consistent and credible change of behavior. But they can make it more difficult for such states to conduct their nefarious business as usual.

In the case of Iran, these extra difficulties can conceivably buy the West more time to either strike Iran's nuclear facilities militarily, or to induce regime overthrow by backing regime opponents, or both. What is absolutely clear is that the broader a divestment plan is, the worse for Iran and its fellow state sponsors of terrorism.

AIPAC's arguments are not without merit. It is not the contentions that are strange, but their source. It is simply bizarre that of all the organizations in the US, the organization dedicated to strengthening America's alliance with Israel is leading the effort to shield the North Korean, Syrian and Sudanese economies from divestment and to limit the damage the divest terror movement can exact on Iran's economy.

Originally published in The Jerusalem Post.

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2 Comments

Marc Handelsman, USA02/10/2008 at 2:30

The American Israel Public Affairs Committee (AIPAC) primarily works in the political realm. It’s better to deal directly with pension and hedge fund managers, who could be persuaded to divest their holdings from Iran/rogue nations and invest in successful Israeli companies.